##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-10877
 TERRA NITROGEN COMPANY, L.P.
  Delaware
    
    73-1389684(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Terra CentrePO Box 6000, 600 Fourth StreetSioux City, Iowa
    
    51102-6000(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number:
(712) 277-1340
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
 þ Yes o No
 Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
 o Large accelerated filer þ Accelerated filer o Non-accelerated filer
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No




---



##### 



TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    20Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 906 Certification
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS
  unaudited
 March 31,
    
    December 31,
    
    March 31,2006
    
    2005
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    47,854
    
    
    $
    7,491
    
    
    $
    66,328Demand deposits with affiliate
    
    
    3⁄4
    
    
    
    26,505
    
    
    
    23,323Accounts receivable
    
    
    14,249
    
    
    
    32,088
    
    
    
    25,715Inventory
    
    
    45,852
    
    
    
    26,732
    
    
    
    20,126Other current assets
    
    
    3,930
    
    
    
    12,356
    
    
    
    12,391Total current assets
    
    
    111,885
    
    
    
    105,172
    
    
    
    147,883Property, plant and equipment, net
    
    
    74,849
    
    
    
    75,920
    
    
    
    79,918Other assets
    
    
    9,048
    
    
    
    10,200
    
    
    
    13,550Total assets
    
    $
    195,782
    
    
    $
    191,292
    
    
    $
    241,351LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    24,785
    
    
    $
    25,113
    
    
    $
    7,481Customer prepayments
    
    
    32,986
    
    
    
    31,673
    
    
    
    70,317Current portion of long-term debt and
capital lease obligations
    
    
    3⁄4
    
    
    
    12
    
    
    
    59Total current liabilities
    
    
    57,771
    
    
    
    56,798
    
    
    
    77,857Long-term debt due to affiliates
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    8,200Other long-term liabilities
    
    
    140
    
    
    
    135
    
    
    
    22Total liabilities
    
    
    57,911
    
    
    
    56,933
    
    
    
    86,079Partners capital:Limited partners interests
    
    
    148,539
    
    
    
    150,952
    
    
    
    155,686General partners interest
    
    
    (10,668
    )
    
    
    (10,644
    )
    
    
    (10,692
    )Accumulated other comprehensive income (loss)
    
    
    3⁄4
    
    
    
    (5,949
    )
    
    
    10,278Total partners capital
    
    
    137,871
    
    
    
    134,359
    
    
    
    155,272Total liabilities and partners capital
    
    $
    195,782
    
    
    $
    191,292
    
    
    $
    241,351
  3




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  (unaudited)
 Three Months EndedMarch 31,2006
    
    2005Revenues
    
    $
    95,478
    
    
    $
    105,742Other
    
    
    (21
    )
    
    
    161Total revenues
    
    
    95,457
    
    
    
    105,903Cost of goods sold
    
    
    96,110
    
    
    
    86,599Gross (loss) profit
    
    
    (653
    )
    
    
    19,304Operating expenses
    
    
    2,038
    
    
    
    2,278Operating (loss) income
    
    
    (2,691
    )
    
    
    17,026Interest expense
    
    
    109
    
    
    
    202Interest income
    
    
    (363
    )
    
    
    (382
    )Net (loss) income
    
    $
    (2,437
    )
    
    $
    17,206Net (loss) income allocable to
limited partners interest
    
    $
    (2,413
    )
    
    $
    16,862Net (loss) income per limited
partnership unit
    
    $
    (0.13
    )
    
    $
    0.91
  4




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  (unaudited)
 Three Months EndedMarch 31,2006
    
    2005Operating activities:Net (loss) income
    
    $
    (2,437
    )
    
    $
    17,206Adjustments to reconcile net (loss) income to net cash
flows from operating activities:Depreciation and amortization
    
    
    3,135
    
    
    
    4,045Non-cash loss (gain) on derivative instruments
    
    
    3,081
    
    
    
    (404
    )Changes in operating assets and liabilities:Receivables
    
    
    17,839
    
    
    
    (4,636
    )Inventories
    
    
    (19,120
    )
    
    
    (4,397
    )Accounts payable, accrued liabilities and
customer prepayments
    
    
    6,484
    
    
    
    12,185Other assets and liabilities
    
    
    6,061
    
    
    
    1,888Net cash flows from operating activities
    
    
    15,043
    
    
    
    25,887Investing activities:Capital expenditures
    
    
    (1,036
    )
    
    
    (1,748
    )Plant turnaround expenditures
    
    
    (137
    )
    
    
    (395
    )Change in demand deposits with affiliate
    
    
    26,505
    
    
    
    13,754Net cash from investing activities
    
    
    25,332
    
    
    
    11,611Financing activities:Repayment of long-term debt
and capital lease obligations
    
    
    (12
    )
    
    
    (14
    )Partnership distributions paid
    
    
    3⁄4
    
    
    
    (12,271
    )Net cash flows used in financing activities
    
    
    (12
    )
    
    
    (12,285
    )Net increase in cash and cash equivalents
    
    
    40,363
    
    
    
    25,213Cash and cash equivalents at beginning of year
    
    
    7,491
    
    
    
    41,115Cash and cash equivalents at end of period
    
    $
    47,854
    
    
    $
    66,328Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    63
    
    
    $
    49
  5




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
  (unaudited)
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2006
    
    $
    150,952
    
    
    $
    (10,644
    )
    
    $
    (5,949
    )
    
    $
    134,359Net loss
    
    
    (2,413
    )
    
    
    (24
    )
    
    
    3⁄4
    
    
    
    (2,437
    )
    
    $
    (2,437
    )Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5,949
    
    
    
    5,949
    
    
    
    5,949Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,512Partners capital at March 31, 2006
    
    $
    148,539
    
    
    $
    (10,668
    )
    
    $
    3⁄4
    
    
    $
    137,871Limited partner units issued and
outstanding at March 31, 2006:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at March 31, 2006
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interest
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2005
    
    $
    150,850
    
    
    $
    (10,791
    )
    
    $
    (6,075
    )
    
    $
    133,984Net income
    
    
    16,862
    
    
    
    344
    
    
    
    3⁄4
    
    
    
    17,206
    
    
    $
    17,206Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    16,353
    
    
    
    16,353
    
    
    
    16,353Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33,559Distributions
    
    
    (12,026
    )
    
    
    (245
    )
    
    
    3⁄4
    
    
    
    (12,271
    )Partners capital at March 31, 2005
    
    $
    155,686
    
    
    $
    (10,692
    )
    
    $
    10,278
    
    
    $
    155,272Limited partner units issued and
outstanding at March 31, 2005:
    
    
    
    
    
    
    
    
    
    
    18,501,576
  6




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Financial Statement PresentationBasis of PresentationThe condensed consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Terra Nitrogen
Company, L.P. (TNCLP) Annual Report on Form 10-K for the year ended December 31, 2005. TNCLP
and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the Operating
Partnership), are referred to herein, collectively, as the Partnership.The accompanying unaudited condensed consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for the fair statement of the results for
the periods presented. All of these adjustments are of a normal and recurring nature. Results
for the quarter are not necessarily indicative of future financial results of the Partnership.Derivatives and Financial InstrumentsThe Partnership accounts for derivatives in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,which
requires that derivatives be reported on the balance sheet at fair value and, if the derivative
is not designated as a hedging instrument, changes in fair value must be recognized in earnings
in the period of change. If the derivative is designated as a hedge and to the extent such
hedge is determined effective, changes in fair value are either (a) offset by the change in
fair value of the hedged asset or liability or (b) reported as a component of accumulated other
comprehensive income (loss) in the period of change, and subsequently recognized in the
determination of net income in the period that the offsetting hedged transaction occurs.Terra Industries Inc. and its subsidiaries (Terra) enter into derivative instruments
including future contracts, swap agreements, put and call options to cap or fix prices for a
portion of the Partnerships natural gas production requirements. Terra also enters into
similar derivative instruments to fix or set floor prices for a portion of the Partnerships
nitrogen sales volumes.Revenue RecognitionRevenue is recognized when persuasive evidence of a transaction exists, delivery has occurred,
the price is fixed or determinable, no obligations remain and collectibility is probable. The
Partnership classifies any discounts and trade allowances as a reduction in revenue. Gains or
losses associated with settled nitrogen derivative contracts are classified as revenue. The
Partnership classifies amounts paid by customers for shipping and handling as revenue.
 7




---



##### Table of Contents



Cost of SalesThe cost of manufacturing fertilizer products is recorded when the fertilizer products are sold
and revenue is recognized. The Partnership classifies amounts paid by customers for shipping
and handling as cost of sales. Premiums paid for option contracts are deferred and recognized
in cost of sales in the month to which the related derivative transactions are settled.
Realized gains and losses on derivatives activities are recognized in cost of sales.InventoriesInventories are stated at the lower of average cost or estimated net realizable value. The
Partnership performs a monthly analysis of its inventory balances to determine if the carrying
amount of inventories exceeds their net realizable value. The analysis of estimated realizable
value is based on customer orders, market trends and historical pricing. If the carrying amount
exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net
realizable value.Production costs include the cost of direct labor and materials, depreciation and amortization,
and overhead costs related to manufacturing activities. The cost of inventories is determined
using the first-in, first-out method.Impairment of Long-Lived AssetsThe Partnership reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum
of the undiscounted future cash flows expected to result from the use of the asset is less than
the carrying amount of the asset, an impairment loss is recognized based on the difference
between the carrying amount and the fair value of the asset.Natural Gas Futures, Swaps, Options and Basis SwapsThe estimated fair value of each class of derivatives is based on published referenced prices
and quoted market prices from brokers.Cash and Cash EquivalentsThe Partnership classifies cash and, except as noted in the following sentence, short-term
investments with an original maturity of three months or less as cash and cash equivalents.
Demand deposits with affiliate are not classified in cash and cash equivalents.Demand Deposits with AffiliateThe Partnership has an arrangement for demand deposits with an affiliate to allow for excess
Partnership cash to be deposited with Terra Capital, Inc. (Terra Capital), the indirect
parent of the General Partner. Excess Partnership cash is received by Terra Capital and earns
interest until the funds can be transferred to Partnership accounts for disbursements. Cash
balances are transferred to the Partnership from Terra Capital on a weekly basis. Amounts on
deposit with Terra Capital earn
 8




---



##### Table of Contents



interest at the rate that Terra Capital receives on its pooled cash investments. The Partnership believes that Terra
Capital and its parent, Terra Industries Inc., have sufficient credit available under its
existing borrowing agreements combined with cash on hand to fully fund all obligations to the
Partnership, upon request. However, the Partnership does have credit risks with deposits held
by Terra Capital in the event of bankruptcy by Terra or its subsidiaries. The Partnership may
be unable to obtain its funds on demand in such a situation.During the 2005 fourth quarter, the Partnership changed its accounting policy concerning
classification of cash deposited with Terra Capital. The new policy results in the
reclassification of deposits with Terra Capital from cash and cash equivalents to demand
deposits with affiliate on the balance sheet and cash flows arising from deposits in and
withdrawals from such demand deposits as a cash flows from investing activities. For the March
31, 2005 balance sheet, the Partnership has reclassified $23.3 million of demand deposits with
affiliate that was presented as cash and cash equivalents in the original Form 10-Q filed on
May 16, 2005. In connection with this balance sheet reclassification, the Partnership
reclassified the cash and cash equivalent balance and included the $13.8 million investing
activity effect of such reclassification in its March 31, 2005 statement of cash flows. There
was no impact to Partners capital or net income as a result of this change.The Partnership believes that presenting the related party deposits in a separate balance sheet
caption and presenting related party deposits and withdrawals as an investing activity in the
statement of cash flows is preferable because the separate presentation (1) is more consistent
with the nature of the deposit, which is subject to credit risk and is not a deposit in a
financial institution and (2) more clearly presents the related party nature of the cash
management arrangement with Terra Capital.Although none of the agreements or conditions governing these deposits has changed, the
Partnership has elected to change the presentation of such deposits to show them as a separate
current asset and not as a cash equivalent. The Partnership continues to have the contractual
right to withdraw these funds on demand and continues to have the ability to access funds
deposited in these accounts on a daily basis. The Partnership may terminate such cash
management arrangement at any time.Use of Estimates in Preparation of the Financial StatementsThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.2.
    
    Agreement of Limited PartnershipThe Partnership makes quarterly cash distributions to Unitholders and the General Partner in an
amount equal to 100% of its Available Cash as defined in the Partnership Agreement.In the first three months of 2006, the Partnership did not pay any cash distributions. In the
first three months of 2005 the Partnership paid $12.3 million in cash distributions to its
partners.
 9




---



##### Table of Contents



At March 31, 2006, the General Partner and its affiliates owned 75.3% of the Partnerships
outstanding units. When less than 25% of the issued and outstanding units are held by
non-affiliates of the General Partner, the Partnership, at the General Partners sole
discretion, may call, or assign to the General Partner or its affiliates, its right to acquire
all such outstanding units held by non-affiliated persons. If the General Partner elects to
acquire all outstanding units, the Partnership is required to give at least 30 but not more
than 60 days notice of its decision to purchase the outstanding units. The purchase price per
unit will be the greater of 1) the average of the previous 20 trading days closing prices as
of the date five days before the purchase is announced and 2) the highest price paid by the
General Partner or any of its affiliates for any unit within the 90 days preceding the date the
purchase is announced. Additional purchases of common units by the General Partner may be
restricted under the terms of Terras bank credit agreement as described therein.3.
    
    Net (Loss) Income per Limited Partnership UnitBasic (loss) income per unit data is based on the weighted-average number of Partnership Units
outstanding during the period. Diluted (loss) income per unit data is based on the
weighted-average number of Partnership Units outstanding and the effect of all dilutive
potential common units.The following table provides the components of basic (loss) income per unit for the three-month
periods ended March 31, 2006 and 2005:
 Three Months EndedMarch 31,(in thousands, except per-share amounts)
    
    2006
    
    2005Basic (loss) income per limited Partnership
unit computation:Net (loss) income allocable to limited Partnerships
interest
    
    $
    (2,413
    )
    
    $
    16,862Weighted average units outstanding
    
    
    18,686
    
    
    
    18,502Net (loss) income per limited Partnership unit
    
    $
    (0.13
    )
    
    $
    0.91
  10




---



##### Table of Contents



4.
    
    InventoriesInventories consisted of the following:
 March 31,
    
    December 31,
    
    March 31,(in thousands)
    
    2006
    
    2005
    
    2005Materials and supplies
    
    $
    7,905
    
    
    $
    7,287
    
    
    $
    8,417Finished goods
    
    
    37,947
    
    
    
    19,445
    
    
    
    11,709Total
    
    $
    45,852
    
    
    $
    26,732
    
    
    $
    20,126
 Inventory is valued at actual first in, first out cost. Costs include raw material, labor and
overhead.5.
    
    Derivative Financial InstrumentsThe Partnership manages risk using derivative financial instruments for changes in natural gas
supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk
and market risk.To manage credit risk, the Partnership enters into derivative transactions only with
counter-parties who are currently rated as BBB or better or equivalent as recognized by a
national rating agency. The Partnership will not enter into transactions with a counter-party
if the additional transaction will result in credit exposure exceeding $20 million. The credit
rating of counter-parties may be modified through guarantees, letters of credit or other credit
enhancement vehicles.The Partnership classifies a derivative financial instrument as a hedge if all of the following
conditions are met:
 1.
    
    The item to be hedged must expose the Partnership to currency or price risk.2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency or price changes on the hedged item (e.g., there is a high
correlation between the hedge position and changes in market value of the hedge item).3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
 Natural gas supplies to meet production requirements at the Partnerships production facilities
are purchased at market prices. Natural gas market prices are volatile and the Partnership
effectively hedges a portion of its natural gas production requirements and inventory through
the use of futures contracts, swaps and options. These contracts reference physical natural gas
prices or approximate NYMEX futures contract prices. Contract physical prices are frequently
based on prices at the Henry Hub in Louisiana, the most common and financially liquid location
of reference for financial derivatives related to natural gas. However, natural gas supplies
for the Partnerships production facilities are purchased at locations other than Henry Hub,
which often creates a location basis differential between the contract price and the physical
price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the
changes in the price of physical gas. The contracts are traded in months forward and settlement
dates are scheduled to coincide with gas purchases during that future period.
 11




---



##### Table of Contents



A swap is a contract between the Partnership and a third party to exchange cash based on a
designated price. Option contracts give the holder the right to either own or sell a futures or
swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of
the contract value and option contracts require initial premium payments ranging from 2% to 5%
of contract value. Basis swap contracts require payments to or from the Partnership for the
amount, if any, that monthly published gas prices from the source specified in the contract
differ from the prices of a NYMEX natural gas futures during a specified period. There are no
initial cash requirements related to the swap and basis swap agreements.The following summarizes the net position of open natural gas derivative contracts at March 31,
2006 and 2005:
 (in thousands)
    
    2006
    
    
    2005Contract
    
    
    Unrealized
    
    
    Contract
    
    
    UnrealizedMMBtu
    
    
    Gain (Loss)
    
    
    MMBtu
    
    
    Gain (Loss)Swaps
    
    
    2,520
    
    
    $
    (3,127
    )
    
    
    9,995
    
    
    $
    13,060Basis swaps
    
    
    1,210
    
    
    
    (423
    )
    
    
    3⁄4
    
    
    
    3⁄4Put options
    
    
    300
    
    
    
    154
    
    
    
    9,758
    
    
    
    (3,804
    )Sold call options
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9,758
    
    
    
    1,426(3,396
    )
    
    
    
    
    
    
    10,682
 Certain derivatives outstanding at March 31, 2006 and 2005, which settled on April 1, 2006 and
2005, respectively, are included in the net unrealized loss in the table above. The April 1,
2006 derivatives settled for an approximate $2.5 million loss. At March 31, 2006, the
Partnership determined that the derivative contracts were ineffective hedges for accounting
purposes and recorded a charge of $3.4 million to cost of sales. Derivatives outstanding at
March 31, 2005 included gains of $0.4 million that were recorded as an ineffective position and
credited to cost of sales for the three-month period ending March 31, 2005.Gains and losses on settlement of these contracts and premium payments on option contracts that
qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and
are credited or charged to cost of sales in the month in which the hedged transaction closes.
Gains and losses on the contracts that do not qualify for hedge treatment are credited or
charged to cost of sales based on the positions fair value. The risk and reward of outstanding
natural gas positions are directly related to increases or decreases in natural gas prices in
relation to the underlying NYMEX natural gas contract prices.The following table sets forth the components of these positions carried in accumulated other
comprehensive income (loss) at March 31, 2006 and 2005:
 (in thousands)
    
    2006
    
    2005Unrealized gains (losses) of open positions
    
    $
    (3,396
    )
    
    $
    10,682Ineffective position charged (credited) to cost of sales
    
    
    3,396
    
    
    
    (404
    )Other comprehensive gain (loss)
    
    $
    3⁄4
    
    
    $
    10,278
 The activity related to accumulated other comprehensive income (loss) for the three month
periods ended March 31, 2006 and 2005 is:
 12




---



##### Table of Contents



(in thousands)
    
    2006
    
    2005Beginning accumulated (loss)
    
    $
    (5,949
    )
    
    $
    (6,075
    )Reclassification into earnings
    
    
    20,268
    
    
    
    3,201Net change associated with current period hedging transactions
    
    
    (14,319
    )
    
    
    13,152Ending accumulated gain (loss)
    
    $
    3⁄4
    
    
    $
    10,278
 At times, the Partnership also uses forward derivative instruments to fix or set floor prices
for a portion of its nitrogen sales volumes. At March 31, 2006, the Partnership had no open
contracts covering nitrogen solutions. When outstanding, the nitrogen solution contracts do not
qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness.
Consequently, these contracts are market-to-market and unrealized gains or losses are reflected
in revenue in the statement of operations. For the three-month period ending March 31, 2006,
there were no gains or losses on nitrogen forward derivative instruments. For the three-month
period ending March 31, 2005, approximately $2.0 million of losses were recognized on nitrogen
forward derivative instruments.6.
    
    Long-Term debt and capital lease obligationsLong-term debt and capital lease obligations consisted of the following:
 March 31,
    
    March 31,(in thousands)
    
    2006
    
    2005Capitalized lease obligations
    
    $
    3⁄4
    
    
    $
    59Long-term debt due to affiliate
    
    
    3⁄4
    
    
    
    8,2003⁄4
    
    
    
    8,259Less current maturities
    
    
    3⁄4
    
    
    
    59Total
    
    $
    3⁄4
    
    
    $
    8,200
 During the 2005 third quarter, $8.2 million of debt was repaid to an affiliate. On December 21, 2004, the Partnership entered into a $50 million revolving bank credit facility
that expires in June 2008 and bears interest at a variable rate plus a margin (London Interbank
Offer Rate (LIBOR) plus 175 basis points, or 6.58% at March 31, 2006). Under the credit
facility, the Partnership may borrow an amount generally based on eligible cash balances, 85%
of eligible accounts receivable and 60% of eligible finished goods inventory, less outstanding
letters of credit. The Partnerships borrowings under the credit facility are secured by
substantially all of its working capital. The agreement also requires the Partnership to adhere
to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset
sales, investments, prepayments of subordinated indebtedness, changes in lines of business and
transactions with affiliates. At March 31, 2006, the Partnership had $50.0 million of borrowing
availability, and, there were no outstanding borrowings or letters of credit under the
facility.
 13




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Introduction
      Dependence on Terra Industries
  14




---



##### Table of Contents



Three months ended March 31, 2006 compared with
three months ended March 31, 2005
  2006
    
    2005Volumes
    
    Unit Price
    
    Volumes
    
    Unit Price(000 tons)
    
    ($/ton)*
    
    (000 tons)
    
    ($/ton)*Ammonia
    
    
    51
    
    
    $
    411
    
    
    
    87
    
    
    $
    300UAN
    
    
    427
    
    
    
    153
    
    
    
    535
    
    
    
    132
 
 *
    
    After deduction of outbound freight costs   Capital resources and liquidity
   15




---



##### Table of Contents



16




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   17




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   FORWARD LOOKING PRECAUTIONS
  18




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  19




---



##### Table of Contents



ITEM 6. EXHIBITS
 (a)
    
    Exhibits:
 Exhibits *31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits *31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit *32
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    filed herewith SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC.as General PartnerBy:
    
    /s/ Francis G. Meyer

Francis G. MeyerVice President (Principal Accounting Officer)Date: May 9, 2006
 20